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How balanced advantage mutual funds can be used to create long-term wealth

How balanced advantage mutual funds can be used to create long-term wealth

13 Sep 2021

Sanjay wants to invest his fixed deposit maturity proceeds of Rs 25 lakh. Unlike last year, valuations are no longer attractive and investment decisions are not easy. He is wary of the sharp up-move in the market over the past year and a half. He refuses to believe that what happened over the last 12-15 months would continue going forward.

He worries if this is the right time to invest in the market and maybe happy to park this money again in a deposit to minimise risk. His financial advisor recommends a balanced advantage fund, as it is an all-season fund, provides flexibility and performs well in volatile markets. Sanjay has heard of the balanced fund but wonders how a balanced advantage fund is different.

Balanced advantage funds invest in a mix of debt and equity. However, the allocation is dynamic and not static. While a traditional balanced fund would have a pre-defined ratio of 70:30 in favour of equity, the balanced advantage funds have an edge, in the sense that the fund manager can allocate as much as 70-80% in either equity or debt, depending upon the market scenario. Typically, when the Nifty or the Sensex fall sharply, such funds will increase allocation to equity and if rates are too high, they increase allocation to long-duration debt, thus outperforming well in both market conditions. Hence, it is owing to this dynamic asset allocation feature that these are known as ‘all-season funds.’

Here the downside risk is mitigated as compared to a situation when one puts 100% money in equity. Investors don’t have to worry about timing the market. The asset allocation formula allows for automatic reallocation so that the fund is invested when markets are rising and on cash when markets are falling. This means the wealth created by a bull market rally is protected by the balanced advantage fund as the allocations in and out of asset classes are rule-based and ensure timely monetization.

The dynamic nature of a balanced advantage fund is extremely useful for long-term wealth creation. It ticks all the right boxes in terms of asset allocation, tax advantage vis-a-vis fixed deposits and doing away with the need to find the opportune time to enter the market because the fund is designed to find the right opportunities for investors like Sanjay in any market cycle.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)